Key senator resists move toward major new taxes, use of permanent fund earnings

Donley, Republican co-chairman of the Senate Finance Committee, is touting a proposed constitutional amendment on spending as the first step in building a long-range fiscal plan to fix the state budget gap.

In the legislative session that begins Monday, the ardent fiscal conservative from Anchorage says he will resist any move toward balancing the budget through major new taxes or use of earnings from the Alaska Permanent Fund.

Donley wants to wait until voters have approved a constitutional amendment restraining spending before making big adjustments to revenues. He says that's necessary to gain the public's confidence that new taxes or permanent fund earnings won't be wasted on a bloated bureaucracy.

The amendment passed the Senate last year and is awaiting House action. It would go on the general election ballot in November.

"We have an almost $1 billion shortfall" in the state general fund, Donley noted. "We're still one-and-a-half times the national average in per capita spending."

On Thursday, he called on Gov. Tony Knowles to freeze hiring for nonessential state positions and to have agency heads prepare contingency budgets with proposed reductions.

Annalee McConnell, Knowles' budget director, said Friday there's no reason to do either.

"What they're forgetting is we've gone through that (budget-cutting) process," McConnell said, referring to the Republican majority's five-year plan to shave $250 million from the general fund during 1996-2000. "This is a revenue problem, at this stage."

As for the constitutional amendment, she asked: "Is the Legislature saying that the public needs to save the Legislature from themselves?" Given that the majority agreed to spending increases last year that already would bust the spending limit in Donley's amendment, she said, "It's kind of ironic, I guess."

And a couple of dozen legislators, including some House Republicans, also say that a comprehensive fix to Alaska's budgetary woes will take more than cuts or a spending cap.

Whether the new amendment would be effective, or a good idea, is a matter of increasingly vigorous debate.

Former Republican Gov. Jay Hammond, still a prominent voice on budget matters, said that Donley's approach is "simplistic."

"I don't agree with the necessity or effectiveness of a spending cap," said Hammond, who favors reimposing the income tax, raising the alcohol excise tax and establishing a cruise ship head tax.

But he said Donley might be right about public sentiment. "The public won't rise up and demand the imposition of new taxes."

If no additional revenue is raised during the 2002 session, the next Legislature might have little more than a year to avert a $1 billion-plus hole in the budget. That's because the Constitutional Budget Reserve, used to plug deficits for all but two years since 1990, is projected to zero out in July 2004 at current spending levels and projected oil prices.

The Legislature could raise taxes in the 2003 session, but some options, notably an income tax, could take up to a year to implement. Some people are worried the result could be a disruption of major state services, such as funding for K-12 education.

Donley's amendment passed the Senate on a 14-6 party-line vote. It would replace an existing constitutional limit on spending that far exceeds any state budget that has been adopted to date, which Donley says has made it an ineffective tool for fiscal discipline.

The current cap, approved by voters in 1982, started with a spending base of $2.5 billion. It included an automatic accelerator, based on inflation and population growth, that has pushed the effective limit to about $6.4 billion, more than twice as much as the comparable spending in this fiscal year.

The spending that's limited is easier to define by what is not included than what is: It doesn't include permanent fund dividends, revenue bond proceeds, debt payments on general obligation bonds, money necessary for disaster response and - a section that is the subject of some debate - "money received from a non-state source in trust for a specific purpose, including revenues of a public enterprise or public corporation of the state that issues revenue bonds."

Donley's amendment also uses exclusions to define the spending that is limited: Not included are any appropriations to the permanent fund, permanent fund dividends, disaster-related expenditures, federal funds, Alaska Railroad appropriations, bond proceeds, debt payments and interagency expenditures of the same funds (to avoid double-counting).

That leaves the state general fund - today, about $2.4 billion - and more than $700 million in a variety of unrelated funds designated only as "other," such as money the University of Alaska spends from tuition revenue.

The proposed spending limit initially is based on $3.1 billion, just under this year's actual spending, according to the governor's Office of Management and Budget.

As it passed the Senate, Donley's bill called for allowing annual increases equivalent to half of the growth in state population and inflation.

But last fall, in an unusual procedural move, he proposed a new version to the House Judiciary Committee: It would cap spending at a 4 percent total increase from two fiscal years prior - effectively, a 2 percent annual increase. If the Legislature chose to spend more than that, the new constitutional provision would require the governor to cut the budget to get back within the limit.

However, with a two-thirds vote of the Legislature, spending could increase 6 percent over two years prior, although the additional 2 percent wouldn't be built into the base. There is talk about going to 8 percent with a three-quarters vote.

And the amendment would be placed on the election ballot periodically, so that voters could repeal it if they found the spending constraints too tight, Donley emphasizes.

OMB's Brad Pierce said that if the amendment were in place now, there would be immediate consequences: In the next fiscal year, which begins July 1, the state must increase its share of Medicaid spending by $95.4 million, or 2.9 percent, which would require a supermajority vote.

"This is just from a change in federal rules," he said. "No accounting for population, inflation or caseload-driven increases."

If the supermajority vote didn't occur, the governor would have to cut other areas of the budget to allow the state to meet its Medicaid obligations, Pierce said. Meanwhile, new state union contracts are going to be pending, and salary increases might be stifled even as the state struggles with a labor shortage, he said.

Sen. Kim Elton, a Juneau Democrat who voted against Donley's amendment last year, challenged its premise.

"I don't think the problem right now is we're spending too much," said Elton, a member of the bicameral, bipartisan Fiscal Policy Caucus. "We're the only state that has a lower budget now than when we began the (last) decade."

Under such an approach, the state wouldn't have built a ferry system in the 1960s, Elton said. And with inflation eating away at largely flat appropriations for education, the state's investment is now 75 percent of what it once was, he said. "There is pain being felt."

But the Fiscal Policy Caucus, while not signing off on the specifics of Donley's proposal, has included a spending cap in its tentative package for a long-range plan.

House Judiciary Chairman Norm Rokeberg, an Anchorage Republican, said he expects some version of the constitutional amendment to pass the House this year.

"I think it'll pass, if for no other reason than it's symbolic," Rokeberg said. "It will demonstrate a method to give some element of comfort to the public."

Some are questioning Donley's inclusion of miscellaneous funds, many of them fee-supported, that have nothing to do with the fiscal gap in the state general fund.

But Donley and David Teal, director of the Legislative Finance Division, say the intent is to discourage the shifting of money out of the general fund in a ploy to mask the overall rate of increase. Such a reclassifying of expenditures wouldn't reduce the fiscal gap, anyway, Teal noted.

But Teal also acknowledged a potentially harmful impact from including other funds. For example, a spike in enrollment at the University of Alaska would bring in a surge of tuition money that would end up counted as state expenditures, forcing reductions elsewhere in government, he said.

Donley touts a "safety valve" in the amendment: If spending needs are pressing, the Legislature could forego paying cash for any capital projects and instead put out a general obligation bond issue for voter approval, freeing up money for other programs.

Donley didn't say what he would do if the House approves new revenue measures this session and moves them over to the Senate.